MIDDLE EAST INVESTORS TO SPEND US$15.0 BILLION PER YEAR IN GLOBAL REAL ESTATE MARKETS

An average of $15.0 billion per year will flow out of the Middle East into direct real estate globally in the near term, according to the latest research from global property advisor CBRE Group, Inc.

The Middle Eastern investor base has expanded, fueled by weakening oil prices; this has led to a major shift in global investment strategies towards greater geographic and sector diversification, with activity spreading across gateway markets to second-tier locations in Europe and the Americas. 

A greater proportion of Middle Eastern capital is now targeting the U.S.— during Q1 2015, US$5.0 billion was invested globally, almost equally split between Europe and Americas, with New York, Washington D.C., Los Angeles, and Atlanta targeted. 

During 2014, the Middle East continued to be one of the most important sources of cross-regional capital into the global real estate market, with US$14.0 billion invested outside of the home region — the third largest source of capital globally. 

London, while retaining the top position, is no longer as dominant, with a 32 per cent share of all Middle East outbound investment in 2014, compared to 45 per cent in 2013. Paris and New York followed London, with 15.8 per cent and 9.6 per cent respectively of the total outbound Middle East investment. 

Top Investment Hotspots for Middle Eastern Capital in 2014

Middle Eastern investors are becoming more active across a wider range of sectors. This is clearly evident in the U.S. where, historically, these investors have bought office buildings and trophy hotels in New York, Los Angeles and other gateway markets. Competition from Chinese investors and other global capital sources means that these investors are increasingly seeking alternatives, such as Abu Dhabi Investment Authority’s $725 million acquisition this year of a 14.2 million-sq.ft. industrial portfolio.

Nick Maclean, Managing Director, CBRE Middle East, said, “The Middle East will remain one of the most important sources of cross-regional capital in the global real estate market. The weakening of oil prices is likely to lead to the sovereign wealth funds reducing their total spend but we see strong growth in overseas investment from families and other institutions, in many cases, for the first time.” 

With a greater allocation to real estate and more concentration on geographical diversification away from the home region, the potential for non-institutional investors to expand their global real estate acquisitions is of growing importance. This growing trend has had a significant impact on Europe—where their combined real estate investments grew by 56 per cent year-on-year to $4.8 billion—creating a shift in the balance between institutional investors and non-institutional. Non-institutional capital accounts for close to 60 per cent of the total Middle Eastern investment in Europe in 2014.

CBRE forecasts that global real estate investment by non-institutional capital from the Middle East will range from US$6.0 billion to $7.0 billion per annum in the near-term, if not higher, increasing from approximately US$5.0 billion per year during 2010 to 2013.

“Private capital from the Middle East is once again becoming a measurably more important investor group globally. The most immediate change will bring down the average lot size, as non-institutional investors tend to target assets at circa US$50.0 million. This extends naturally to a more diverse investment strategy—a trend already felt in the market so far in 2015 and is expected to become more pronounced in the next 6-18 months. In particular, we expect the Americas region to see more capital flows from the Middle East, with Europe less dominant than it has been over the last five years,” said Chris Ludeman, Global President, CBRE Capital Markets.

In addition to private capital, SWFs from the Middle East are also expected to remain important market-makers, albeit not as strong in their acquisition strategies as they would have been if oil prices had not fallen. It is very unlikely that regional governments will make radical decisions to affect the existing capital allocations, with only new allocations likely to be affected. CBRE expects US$7.0 billion to $9.0 billion per annum of Middle Eastern SWF investment to flow into direct global real estate in the near- to mid-term, compared to what would have otherwise been in the range of US$9.0 to $11.0 billion per annum had oil prices remained at levels above $100 per barrel.

“Recent signs that the Middle Eastern investor base is maturing and becoming more complex in nature are a healthy attribute not only in the context of global real estate, but also for the development of local markets in the Middle East. However, as a significant proportion of wealth accumulated in the Middle East will continue to be natural resource driven, diversification, and global diversification in particular, will be the key to Middle Eastern investors’ future strategies,” said Iryna Pylypchuk, Global Research, CBRE.